Budget consistent with stable outlook: Moody’s

Prime Minister Manmohan Singh talks to the media after finance minister Pranab Mukherjee presented the annual budget in Parliament in New Delhi on Monday. AP Photo

Updated: Tue, Jul 07 2009. 01 41 PM IST

Mumbai: Ratings agency Moody’s Investors Service said on Tuesday that India’s budget for 2009-10 is consistent with a stable outlook on its sovereign ratings, although it said the commitment to cut a debt overhang was weak.

In Monday’s budget, the government estimated the fiscal deficit would widen to 6.8% of gross domestic product, its highest in 16 years, in the fiscal year ending in March 2010 from 6.2% in the previous fiscal year.

“This is clearly a growth-oriented budget and contains a slightly larger than expected headline deficit number, but it is broadly consistent with near-term stability in the government’s debt trajectory,” Aninda Mitra, a senior analyst at Moody’s, said in an email to Reuters.

Moody’s has an investment-grade Baa3 foreign currency rating and a non-investment grade Ba2 local currency rating for India.

Moody’s said shortcomings in overall spending management and the high debt overhang were reflected in India’s junk grade domestic rating.

“This is because, relative to other large emerging markets, India’s institutional commitment, backed by socio-economic consensus, to reduce the debt overhang has been weak,” Mitra said.

The government increased its gross borrowing target for 2009-10 to a record Rs4.51 trillion ($93 billion) from 3.62 billion outlined in an interim budget in February.

Prime Minister Manmohan Singh talks to the media after finance minister Pranab Mukherjee presented the annual budget in Parliament in New Delhi on Monday. AP Photo

Financial markets tumbled on Monday on concerns about spending and lack of bold reforms, with the share market falling 5.8%, their biggest drop in six months, and the rupee fell 1.4%, its biggest drop in three months.

The benchmark 10-year bond hit a three-month high of 7.04% on Monday.

Fitch Ratings, which has a BBB-minus rating on India’s foreign and local debt, on Monday said the budget might not alleviate pressures on its credit ratings.

“I don’t think downgrade pressures have increased -- it has only been a few months since we changed the outlook,” Takahira Ogawa told Reuters on Monday.

In February, Standard & Poor’s cut its outlook on India’s long-term sovereign credit rating to “negative” from “stable”, citing an “unsustainable” deterioration in the fiscal position.

Moody’s said its medium-term concerns remained due to the absence of clear asset sales plans or a broader agenda of structural reforms.

“We remain cautious about how the government can hope to avoid complicating monetary management, without advancing structural reforms or reprioritising expenditures or pushing for disinvestments more vigorously,” Moody’s Mitra said.

Moody’s also said a cyclical deterioration in public finances could leave the government ill-equipped to deal with any further external shocks.